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00:00Let me quickly bring on board Dhananjay Sinha, switch focus, co-head of equities in terms

00:05of research as well as strategy at Systematics Group.

00:09Welcome, Mr. Sinha.

00:11I want to first start off, always good chatting with you, sir.

00:15So I want to first start off to try and understand from you, we've seen a very good rally.

00:21If you can quickly give us your viewpoint on whether earnings will continue to grow

00:26and compound at the rate at which they continue to, especially in the small and mid-cap space.

00:32Just talk us through whether that can continue.

00:36So I think, you know, there has been a performance by the small and mid-cap space compared to

00:42the large cap over the last several quarters.

00:46And I think recently there has been volatility, you know, because of global factors and stuff.

00:51So I think there has been a rebound again.

00:55So I think China's, you know, play against India in terms of the valuation sector had

01:02actually played out recently.

01:04But I guess the conviction out there has actually diminished somewhat, and as a result of which

01:09there is a rebound in the domestic markets as well.

01:12And I think the middle small cap has actually participated in that rally again.

01:17So if you look at, you know, this is largely a discussion on flows, and this is significantly

01:23to do with the domestic, you know, retail investors and mutual funds actually participating

01:29over here.

01:30And the preference of the investors has been in the middle small cap.

01:34I think what is important to really understand is where the valuations are lying and how

01:39the earnings outlook would pan out.

01:42So if you look at the valuation per se, you know, for the mid-cap and all, it's been roughly

01:49about 50% higher, if you look at the benchmark indices, 50% higher than the NIFTY PE, which

01:57is currently trailing on a trailing basis about 23.5 times.

02:03And there I would say that it is expensive relative to the benchmark index.

02:09I think what is also important in terms of the sustenance of this valuation premium that

02:15the middle small cap are enjoying is also, what is also relevant is whether the earnings

02:22quite actually pan out as is expected.

02:25And with this kind of a premium, one would expect, you know, more than 20, 30% earnings

02:32growth.

02:33Whereas what we find is that broadly across the sectors that we've looked at, it does

02:38look like there is a certain amount of pressure in terms of the top-line growth and demand

02:43scenario.

02:44And there is some concerns on the margin pressure also across larger sectors.

02:51So I would say that even in the large cap, there could be a sort of a correction in the

02:55estimates post the result season.

02:59And I would say that that would also pan out for the small and mid-cap because we do think

03:04that there will be constrained cash flow and I think top-line growth, et cetera.

03:09So the small and mid-cap would actually face that phenomenon along with the large cap companies.

03:17So pricing pressure, et cetera, will be there.

03:20So we need to be selective on the mid and small cap because the premium, valuation premium

03:26that has been given can actually start to come up if the earnings are not commensurate

03:34to the valuation that they are trading at.

03:38Right.

03:39So short on time.

03:40So I'm going to try to squeeze in a few questions very quickly.

03:43One on the Realty Pack.

03:44We spoke with, we were just speaking with arcade developers, Bombay looks, in terms

03:50of volume, looks strong in terms of growth.

03:52Are you seeing any signs of cooling, especially in that pack because it's done so well over

03:56the last three years.

03:58Nifty Realty has given outstanding returns.

04:01Yeah.

04:02So I think the Nifty Realty index is trading at 54 times, you know, if you look at the

04:07benchmark indices, it's more than double.

04:10I would say that this is largely to do with the, you know, the momentum that's been there

04:15in the premium segment and the ultra-luxury segment, where the real estate developers

04:21done really well in terms of the, in terms of the value, value they have actually registered

04:27and the volume as well.

04:30I would say that as of now, from the peak level, there does seem to be signs of fatigue.

04:35There does seem to be a certain correction in terms of both the volume and the price

04:43as well.

04:44And I think the funding of some of these real estate players by some of the finance companies,

04:53that is coming under a certain amount of pressure.

04:57And there is a certain amount of cash flow issue that is happening with respect to the

05:01developer financing as well.

05:06So I think we need to be cautious over there.

05:09Right.

05:10And so with this entire pharma, chemical, fertilizer kind of theme, including agrochem,

05:17you know, of course, three separate segments performing in three very different ways.

05:23Pharma has done very well.

05:25Chemicals pick up still expected, maybe H2.

05:27Just talk us through whether you're expecting that turnaround in chemicals, whether pharma

05:31can continue or have we peaked in terms of the cycle?

05:35How do you believe it's going to play out?

05:38So I think as far as the, you know, chemical sector is concerned, I think the concern with

05:44respect to the competition from China continues in the context that the Chinese economy is

05:49slowing.

05:50I think they're trying to come up with stimulus sector to show the demand, show up the demand.

05:57I think the overall context is that the competition, the demand scenario in the Chinese domestic

06:03market is actually weak and there are more protectionist measures that have been taken

06:07by US and Europe as well.

06:09So I think the dumping concerns with respect to the chemical companies might actually continue.

06:14That's the text for the chemical space.

06:18I would say that agrochemical is doing relatively better in the context that you have a better

06:25curry season, good sowing, good rainfall, and I think the prospects on rabi season is

06:30also good.

06:31So I think as far as the agrochemical space is concerned, I think that can do better.

06:38And I think that that segment is outperforming any which way.

06:41I think the pharma segment is, again, see, the thing is that, I mean, this is outperformed

06:49the index by at least about 15 to 20%, I would say, in the span of last one year or so.

06:56I would say that there is still some run up that can happen.

07:04I would say, if you look at the US business sector, there does seem to be some traction

07:09in terms of the revenue growth.

07:12So I think large cap companies are expected to do well.

07:16You have Sun Pharma, DVS has been showing some amount of turnaround, but I think in

07:23the mid-cap space, I think there are some segments that we are sort of liking.

07:30So the Jubilant Pharma is one stock that we've been liking, and we see a significant upside.

07:40And Alisan, one diagnostic companies as well, Krishna Diagnostic, which basically does provide

07:47diagnostic facilities across public sector companies, government hospitals, and even

07:53some private hospitals as well.

07:56So I think it's a low fixed cost model.

07:59It's got a good operating leverage prospects in the coming years.

08:03So that's one stock that we've been looking at in the mid-cap space as well.

08:09So I think those are the thoughts we have.

08:12And I would say that even the EMA space, there does seem to be some traction.

08:19Dixon and Amber are actually diversifying into newer space to actually gain profitability,

08:29et cetera.

08:30But I think the run up has been very significant.

08:32So I think we need to be selective in the space, but overall space looks to be good.

08:38So, you know, conversation can be endless.

08:41Unfortunately, we are really short on time.

08:43We're going to speak with you again, of course, get better perspective, but it's been a great

08:47conversation.

08:48Thank you so much for coming in and speaking with us.

08:49With that, completely out of time on this edition of The Smith Show, from myself, Anushi,

08:53everyone who puts the show together, thanks so much for watching.

08:56Stay tuned to NDTV Profit, more action on the other side.

Factors Weighing On Earnings Growth In Q2 | NDTV Profit

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